Residential rental yields in Asia to stabilise

MUMBAI: Residential rental yields in Asian Tier-1 cities will either stabilise or rise marginally as capital value appreciation begins to drag, according to a report by real estate experts.

The past few years have seen a faster rise in capital values of properties over rent prices across Asia and this has led to a decline in rental yields, according to a report by Ashutosh Limaye, head of research and real estate intelligence service at Jones Lang LaSalle India (JLL).

In Mumbai, residential property prices have surpassed their previous peak in the third quarter of 2008 (3Q08) and continue to remain high despite a slowdown in the Indian economy from an 8% GDP growth rate in 2010 to 2012, to 5% in 2013. Despite the increase in property prices, yields have fallen by 50 to 90 basis points (bps) across various precincts from 2007 to 2013. After property prices took a beating during the global financial crisis, rental yields bounced back quickly, resulting in a yield compression.

This trend has echoed across various Tier-1 cities in Asia such as Hong Kong, Singapore, Beijing and Manila. Jakarta faced the sharpest fall in rental yields by 250 bps and this is attributable to the steep rise in capital values beginning in 2Q10.

Several Asian governments have started taking steps to cool down property prices. In India, measures to curb speculative buying include the approval and visible fast-tracking of the Real Estate Regulatory Bill, which checks demand and supply imbalances and brings more transparency to the sector.

In China, measures include raising the minimum down payment, raising the interest rate for second home purchases and restrictions on property purchases by non-Chinese buyers.

The initiative to curb further increase in capital values will stabilise the residential yields in the short term. The report sees this as positive for the Asian real estate sector as a whole, as current prices and yields do not correctly reflect the actual macro-economic scenario.

Existing high capital values could instigate governments to further step up efforts to curtail speculation, resulting in a price correction or at least stabilisation. Rental prices are likely to remain unchanged, halting a further yield compression, said JLL.

The report said a further rise in capital values could boost demand for housing rentals as home purchases become less affordable, leading to increased rental values. This would stabilise yields if both capital and rental values grow in tandem.

According to JLL, an increasing number of investors focused on emerging Asia may switch to investing in other more developed regions in the future, attracted by higher yields and better amenities. Such a trend may lead to a fall in domestic property prices in Asia, thus putting a floor to yield compression or fuelling a gradual rise in yields.

Residential rental yields are calculated by dividing the annual rent over the total cost of the property, and expressed as a percentage. It is used to measure the annual rate of return an investor can earn from his capital invested in a property.


This article first appeared in The Edge Financial Daily, on November 8, 2013.